Law of Agency

By | February 21, 2019
Agency

This article presents a brief analysis of the Law of Agency under the Indian Contract Act and focuses upon the role of agents and principal with the third person.  In the contracts of the agency, there exists a legal relationship between two people where one person acts on behalf of the other. The essence of the principal-agent relationship is that the principal for whatsoever reasons hires an agent to do the same work or manage some task on his behalf and consequently deals with a third person. This relationship is based on the maxim “qui facit per alium facit per se”. An agency can be created by express or implied consent, conduct, necessity or by the ratification of the agent’s act by the principal.

Introduction

In India, the agent and principle share a relationship that is contractual in nature, and therefore it is governed by the terms and conditions of the contract between them. Chapter X of the Indian Contract Act, 1872 provides the basic structure of rules and regulations that basically govern the performance and formation of any type of contract including the agency contract. In agency contracts, there exists a legal relationship between two people whereby one person acts on behalf of the other.

Meaning

Section 182 of the Indian Contract Act defines an “agent” as a person employed to do any act for another or to represent another in dealing with a third person. The person for whom such act is done, or who is so represented, is called the “principal”. Chapter 10 of the Indian Contract Act deals with the rights and liabilities and duties of principal and agent inter se as well as those of third parties. In an agency one person (principal) employs another person (agent) to represent him or to act on his behalf, in dealing with the third person. If an agent has been duly authorized to do an act on behalf of the principal, the principal is bound by such act with the third party as if the principal had done the act himself.

Different Kinds of Agents

Depending on the kind of authority given to the agent to act on behalf of the principal, the agents are of the various kinds.

  1. Auctioneers – An auctioneer is an agent whose business is to sell goods or other property by public auction, i.e., by open sale. An auctioneer is a mercantile agent within the meaning of Section 2(9) the Sale of Goods Act. He only has the authority to sell goods and not to give warranties on behalf of the seller, unless expressly authorized in that behalf.
  2. Factors – A factor is also a mercantile agent who is entrusted with the possession of the goods for the purpose of sale. He has the power to sell goods on credit and also to receive the price from the buyer. A factor has the right of general lien over the goods belonging to his principal, which are in his possession, for the general balance of the account.
  3. Brokers – A broker is an agent who has an authority to negotiate the sale or purchase of goods on behalf of his principal, with a third person. Unlike factor, he himself has no possession of the goods. He gets his commission whenever any transaction materializes through his efforts.
  4. Del Credere Agents – He is an exception to the rule that an agent is not answerable to his principal for the failure of the third party to perform the contract. A del credere agent is a mercantile agent, who, on payment of some extra commission, known as del credere commission, guarantees the performance of the contract by the third person. On the failure of the third person to pay, the principal can make the del credere agent liable.

Some Features of a Contract of Agency

  1. Section 183 of the Indian Contract Act says that the principal should be competent to contract. Since through an agent, a contract is to be created between the principal and the third person, it is necessary that both of these parties should be competent to contract. Therefore, any person who is of the age of majority and of sound mind may employ an agent.
  2. The agent may not be competent to contract. The capacity of the agent could be looked from two angles i.e capacity of the agent to act on behalf of the principal so as to bind the principal to the third person; and, the capacity of the agent to bind himself by a contract between himself and the principal. Considering the first case, Section 184 of the Indian Contract Act provides that, any person can become an agent even though he is not competent to contract. But, in the second case where it is about the capacity of the agent to bind himself by a contract between himself and the principal, it is necessary that the agent should be competent to contract. Thus, if an agent is minor, through him a valid contractual relationship will be created between the principal and the third person, though such an agent himself will not be responsible for his acts to his principal.
  3. No consideration is necessary to create an agency. As per Section 185 of the Indian Contract Act, no consideration is necessary to create an agency. From the fact that the principal agrees to be bound by the act of the agent, and he has a duty to indemnify the agent, sufficient consideration is presumed, and, therefore, no other consideration is necessary for such a contract.

How is the agency created?

  1. By Actual Authority– A principal is bound by the acts done by his agent with his authority. The authority to act on behalf of the principal may be conferred on the agent either expressly or impliedly. An authority is said to be express when it is given by words spoken or written and an authority is said to be implied when it is to be inferred from the circumstances of the case; things were spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case (Section 187).
  2. In a situation of Emergency, an agent can act on behalf of the principal for preventing the principal from the loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances (Section 189).
  3. A person may be liable as a principal because of his conduct, on the basis of the law of estoppel. This means, at times an agent has no authority to act of the principal, but the principal by his conduct creates an impression in the mind of the third person that the agent has an authority to act on his behalf. In such cases, the principal is liable towards the third  person for the acts done by the agent, on the ground of the application of the law of estoppel (Section 237)
  4. By Ratification. Even though the agent’s act has been done without the principal’s prior authority, he may ratify such an act and make himself liable for the same. Here, the principal may be bound by the act of the agent done without any kind of authority, and that is when the principal ratifies, i.e., accords subsequent approval, to an act done without the principal’s authority or knowledge, but on his behalf, he has an option either to disown the act or to satisfy the same. Section 196 to 200 of Indian Contract Act deals with ratification.
  5. By a husband-wife relationship.  Agency in the relationship of husband and wife arises either by cohabitation or by necessity. It is an agency by cohabitation when a married woman cohabiting with her husband is presumed to have the power to pledge the credit of her husband for necessaries according to the life of the family. Hence, the authority is presumed to be there when the husband and wife are cohabiting in a domestic establishment. And, agency by necessity arises even if the husband and wife are not living together she could pledge the credit of her husband. Such authority was presumed when neither the husband was supporting her nor had she the means of supporting herself. However, there is no such agency in India as a wife can claim maintenance under her personal law.

Essentials of a Valid Ratification

  1. The act should be done on behalf of another i.e. of the person who seeks to ratify the same. For example, if a person acts on behalf of A, it cannot be ratified by B. An illustrative example would be, if A is asked by B to purchase wheat in the joint account of A & B, but A purchases wheat on his own account only. Subsequently, B purports to ratify the act of A. Then the prices fall, and B refuses to be bound by the transaction. It has been held in Keighley, Maxted & Co v. Durant, that B is not bound by the transaction, as he could not ratify the act which was done by A on his account only, and not on B’s behalf.
  2. The principal should be in existence, and competent to contract. When the principal ratifies the act, its validity relates back to the time of doing the act by the agent. The act is as valid as if done with the prior authorization of the principal. It is, therefore, necessary that the principal must have been in existence, and also competent to contract, at the time the act purported to be ratified was done. For example, the promoters of the company entered into a contract on behalf of a company that is yet to come into existence. After the company has been formed, it purports to ratify the contract. The company then goes into liquidation. If the promoters are sued on the contract, they cannot say that now the company’s liability had risen by ratification, and their liability has now come to an end.  In Kelner v. Baxter, it was held that the company’s liability did not arise as the company could not ratify the act, which was done at a time when the company was not in existence. The promoters will, therefore, be liable in respect of the contract.
  3. Ratification with full knowledge of facts.  According to Section 198, no valid ratification can be made by a person whose knowledge of the facts of the case is materially defective.
  4. Ratification of the whole transaction- A principal if makes any ratification, he/she is believed to ratify the whole act and not just those parts of the transaction that is favorable to him (Section 199).
  5. The ratified act should not be injurious to a third person. According to Section 200, id ratification of an act is done without the authority of a person, it would result in injury to the interest of a third person, the ratification would be invalid.
  6. For the ratification to be valid, it is important that it must be done within a reasonable time.
  7. Ratification must be express or implied in the conduct of the person on whose behalf the acts are done.

Effect of Ratification: The Doctrine of Relation Back

The ratification of the act by the principal, done on his behalf without his authority or knowledge, the effects of it are same as if the act of ratification was performed with the prior authorization of the principal (Section 196). The date of contract by the agent, and not the date of ratification by the principal, is the date of entering into the contract. In Boulton Partners v. Lambert, where the managing director of a company sells sugar to A, on behalf of the company, without any authority, on 1st January. The company tries to ratify the transaction on 1st February, but on 15th January (before ratification) A wants to withdraw his offer, he cannot because by subsequent ratification, the contract is deemed to have made on 1st January, and it was held that there can be no withdrawal of offer after that.

But, the position is different if the agent purports to make the contract ‘subject to ratification’ by the principal. In such a case, the date of making a contract is the date of ratification and in such case, there can be a possibility of revocation of the offer before ratification.

Duties of an Agent

  1. Duty not to delegate his duties. Latin principle of “delegatus non potest delegare” states that an agent to whom some authority has been delegated cannot further delegate that authority to another person. The has been imbibed in Section 190 of the Indian Contract Act. It means an agent who agreed to act personally cannot appoint a sub-agent to do that job. But, there are certain exceptions to this rule where an agent can employ a sub-agent and these are, where there is a custom of trade to that effect, when the nature of agency so requires, when action does not require a personal skill and when the principal expressly or impliedly agrees to the appointment of a sub-agent for doing certain work.
  2. Duty to follow the principal’s directions i.e. an agent is bound to conduct the business of the principal according to the directions given by the principal. In absence of any directions, the agent should conduct the business according to the custom which prevails in doing the business of the same kind at the place where the agent conducts the business. When the agent does not act as stated above, if any loss is sustained by the principal, he must make it good to his principal, and if any profit accrues, he must account for it (Section 211).
  3. Duty to show proper skill and care as in generally possessed by persons engaged in similar business unless the principal has notice of his want of skill. According to Section 212, he is bound to make compensation to his principal, in respect of the direct consequences of his own neglect, want of skill, or misconduct.
  4. Duty to render proper accounts to the principal on demand (Section 213).
  5. Duty to communicate with the principal and in case of difficulty use all his diligence in communicating with his principal, and in seeking to obtain his instructions (Section 214).
  6. Duty to not deal on his own account in the business of the agency, unless the principal consents thereto. And, if the agent does so without the prior consent of the principal, the principal may, repudiate the transaction by showing either that any material fact has been dishonestly concealed from him or that the dealings of the agent have been disadvantageous to him (Section 215) or claim from the agent any benefit which may have resulted to him from the transaction (Section 216).
  7. Duty to pay sums received by him on the principal’s account (Section 218). Before making the payment to his principal, the agent is entitled to deduct out of the same sums as are lawfully due to him (Section 217).

Rights of Agent and Duties of Principal

  1. Right to remuneration – An agent is entitled to remuneration for the work of agency done by him, but an agent’s remuneration does not become due until the completion of the act assigned to him. According to Section 219, this rule is subject to any special contract between the principal and the agent. However, as per the rule laid down in Section 220, an agent who is guilty of misconduct in the business of agency is not entitled to any remuneration in respect of that part of the business which he has misconducted.
  2. Right to retain sums i.e the agent has a duty to pay his principal all the sums received on the principal’s account but has the right to retain money due to himself (Section 217).
  3. Right of lien on principal’s property until commission, etc. due to him has been paid (Section 221).
  4. Right to be indemnified. It is very crucial, the principal is bound to indemnify an agent against the consequences of all lawful acts done by such agent in the exercise of the authority conferred upon him (Section 222). The agent is also entitled to indemnify against the consequences of the act done in good faith, even though the act causes an injury to the rights of third persons (Section 223). And, if an agent commits crime at the instance of the principal, the agent cannot claim indemnity from the principal against the consequences of the crime, even though the principal has expressly or impliedly, promised to indemnify him (Section 224).
  5. Right to compensation for damage due to the principal’s neglect in respect to an injury caused to such agent (Section 225).

Relations of Principal and Agent with Third Person

Liability of the Principal

According to Section 226 of the Indian Contract Act, an agent acts on behalf of the principal for creating contractual relationship between the principal and the third persons, and, therefore, for the contracts entered into through an agent, the principal becomes bound towards a third person in the same manner as if he entered into the contract himself.  Apart from being bound by the acts which are done under the principal’s authority or for which he is bound in an emergency, by estoppel or ratification, the question of the principal’s liability arises in the following cases:

  1. Principal’s liability when the agent exceeds authority – Section 227 states that the principal is bound only for such acts of the agent which are within the authority of the agent. He is not liable for the agent’s acts done outside the authority. If a part of the agent’s act is within the authority and a part outside it, and both can be separated, the principal is bound by that part which is within the authority, and not for that part which is outside the authority. And Section 228 talks about how if the two parts cannot be separated, then the principal is not bound to recognize the transaction.
  2. Notice to the agent is notice to the principal, but it should be in the course of business (Section 229).
  3. Principal’s liability for the agent’s fraud, misrepresentation or torts. According to Section 238, when there is a fraud or misrepresentation by an agent while making an agreement on behalf of the principal, it not only affects the validity of the contract but also makes the principal liable, as if that fraud or misrepresentation has been made by the principal. The liability of the principal is based on the rule ‘Qui facit per alium facit per se’, which means the act of the agent is the act of the principal. For example, in National Bank of Lahore v. Sohan Lal, the manager of a bank, tampered with the locks of the lockers in which plaintiffs’ valuables were kept, the bank was held vicariously liable for the loss which has been caused to a customer due to the theft of their valuables from the lockers.

Personal Liability of the Agent

According to the Section 230 of the Indian Contract Act, when an agent acts on behalf of his principal in his dealings with a third person, a contractual relationship between the principal and the third person is created and the agent is not personally liable. It is the principal who is liable to the third person. Nor is the agent entitled to enforce the contracts entered into on behalf of the principal and this is subject to contract to the contrary.

In the following exceptional cases, the agent is presumed to have agreed to be personally bound :

  1. When the agent acts on behalf of a foreign principal – When an agent has entered into a contract for the sale or purchase of goods on behalf of a principal resident abroad, the presumption is that the agent undertakes to be personally liable for the performances of such contract.
  2. When the agent acts for an undisclosed principal i.e. when he does not disclose the name of the principal then there arises a presumption that he himself undertakes to be personally liable. When the principal is undisclosed, the liability under Section 230 is of the agent only, and the principal cannot be sued in such a case. And under Section 231, if an agent makes a contract with a person who neither knows nor has the reason to suspect that he is an agent, his principal may require the performance of the contract. This Section also makes clear that the rights of a third person, he has against the principal. If the principal wants to obtain the performance of the contract, he can do so subject to the rights and obligations between the agent and the third person (Section 232).
  3. When the principal cannot be sued i.e. he is someone who is not potent to contract, the agent is presumed to be personally liable. (Section 230)
  4. When there is a contract for the agent’s personal liability – Section 230 mentions the general rule that the agent is not personally liable also states that this is so “in the absence of any contract to that effect”. If an agent undertakes a personal liability, for example, he purchases the goods mentioning himself as the purchaser and does not disclose that he is an agent and mentions that the purchaser is under obligation to perform the contract, the agent will be personally liable in such a case (Alliance Milla v. India Cements Ltd.)
  5. When the agent commits a breach of legal obligation i.e fails to perform a legal obligation, such as a contractual duty or statutory duty or commits a tort against a third person, that renders him personally liable for the consequences thereof.
  6. Liability of pretended agent – if the agent pretends but is not an actual agent, without any authority and the principal does not rectify the act but disowns it, the pretended agent will be himself liable (Section 235).
  7. Liability for breach of warranty of authority – When the agent exceeds his authority, misleads the third person in believing that the agent he has the requisite authority in doing the act, then the agent can be made liable personally for the breach of warranty of authority.

The Option of The Third Person to Sue The Agent or The Principal

Section 233 and 234 maintain that where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them, liable. However, if the third person has induced the belief that he will make only one of them liable, the third person is bounded thereby, because of the law of estoppel.

Termination of Agency

The agency may be terminated for the following reasons as per Section 201:

  1. By revocation of authority
  2. By renunciation of the business of agency by the agent
  3. By the completion of the business of the agency
  4. By the death or insanity of either the principal or the agent
  5. By insolvency of the principal.

Rules of Revocation of Authority

  1. Revocation of the agency may be either express or implied (Section 207).
  2. There can be no revocation of authority when an agent has an interest in the subject-matter.  (Section 202)
  3. The principal may revoke the authority before the agent has exercised the same, so as to bind the principal (Section 203).
  4. If there is premature revocation of agency without sufficient cause, the principal must make compensation to the agent, for such revocation (Section 205).
  5. When the principal, having justification to do so, revokes the authority, he must give reasonable notice of such revocation to the agent, otherwise, he can be liable to pay compensation for any damage caused to the agent (Section 206).
  6. Termination of the authority of an agent causes the termination of the authority of the sub-agent appointed by him (Section 210).
  7. When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take, an behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him (Section 209).

Time from which the Termination of Agent’s Authority Becomes Effective

The termination of agency does not become effective immediately. It takes effect:-

  1. Against the agent, when the fact of termination becomes known to him.
  2. Against third persons, when they come to know of the same.

Renunciation of Agency by the Agent

As the principal can revoke the agent’s authority, so also the agent can renounce the agency. The agent must give to his principal reasonable notice of renunciation, otherwise, he will be liable to make good for the damage caused to the principal for want of such notice (Section 206). Like revocation, renunciation may also be express or implied (Section 207). Where the agency is for a particular time, premature renunciation, without sufficient cause, will make the agent liable to his principal (Section 207).

By Ritika Chaturvedi

(Faculty of Law, University of Delhi)

SOURCES:

  1. Indian Contract Act, 1872 (Bare Act).
  2. Indian Contract Act, Dr R.K. Bangia
  3. MULLA The Indian Contract Act, 13th Edition 2011.

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